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Focusing on High-Quality Companies with Sustainable Growth Trends
Key takeaways
- Market performance was mixed during the quarter as investors navigated macro uncertainties. U.S. large cap growth was up while international, small caps and value lagged.
- The rally in U.S. growth was dominated by semiconductors, technology hardware, as well as media and entertainment industries as the artificial intelligence trade once again led markets.
- The Voya Small Company Strategy outperformed its benchmark, the Russell 2000 Index (the Index) on a net asset value (NAV) basis primarily due a positive impact from both stock selection and active allocation bets.
- The Strategy benefited from selection in the healthcare and materials sectors.
- Conversely, selection in the industrials and communication services sectors detracted.
- Despite challenges, the U.S. economy remains resilient. Inflation remains a key focus, with the U.S. Federal Reserve holding interest rates steady to curb its impacts.
- Economic and Fed data continue to call for "status quo" equity positioning. However, we anticipate a regime shift as the market gains confidence in the next phase of Fed policy.
Portfolio review
U.S. stocks advanced during the second quarter on continued strength in the labor market and in several key economic measures. The S&P 500 Index (SP500,SPX) rose by 4.28% during the quarter and the Nasdaq Composite (COMP:IND) grew by 8.26%. The information technology and communication services sectors led, while energy and materials lagged. Large-cap stocks outperformed small caps and growth significantly beat value. The Federal Open Market Committee held interest rates steady throughout the quarter and is now expected to cut rates only once in 2024. While Fed Chair Powell acknowledged modest progress on taming inflation at the central bank's June meeting, he emphasized the need for more confidence about the inflation situation before making any changes to rates.
U.S. bond performance was essentially flat during the quarter. The Bloomberg U.S. Aggregate Bond Index inched up 0.07%, and the 10-year U.S. Treasury (US10Y) yield rose from 4.33% at the start of April to 4.36% by quarter end.
The Strategy outperformed the Index on a NAV basis for the quarter June 30, 2024, primarily due a positive impact from both stock selection and the active allocation bets. The Strategy benefited from selection in the healthcare and materials sectors.
Conversely, selection in the industrials and communication services sectors detracted.
The main individual contributors to performance were Insmed Inc. (INSM), Zeta Global Holding Corp. (ZETA) and Super Micro Computer, Inc. (SMCI)
The overweight position in health care company Insmed Inc. ("INSM") had a significantly positive impact on relative returns. INSM'S price appreciated nearly 150% during the quarter, driven by double-digit growth across all territories in the first quarter and a strong growth outlook based on the current pipeline. The overweight position is based on the model's positive view of the stock's quality and size features. Within quality, research and development (R&D) intensity, earnings and yield and governance drove the score up.
The overweight position in technology company Zeta Global Holdings Corp. ("ZETA") also contributed positively to relative returns. The model had a modestly favorable view of ZETA due to its strong size and quality characteristics. In terms of quality, ZETA stands out with its robust R&D intensity feature, capital acquisition ration and strong return on invested capital ('ROIC'). The company, which specializes in marketing technology software, delivered strong first quarter earnings due to increased brand recognition and efficiency in its operations while simultaneously increasing 2Q24 and fiscal year guidance.
The underweight in technology stock Super Micro Computer, Inc. ("SMCI") was the third largest contributor during the quarter. SMCI specializes in technology solutions distribution and manufacturing and falls into the inexpensive, underappreciated quality category. The machine learning ('ML') models have a negative view of the stock driven by its quality and technical factors and features. Within quality, the ROIC and return on equity ('ROE') and efficient use of equity capital features are driving the score down. Despite an increase in guidance from management, margins are under pressure and the stock price declined relative to the benchmark.
The primary detractors from performance were Bruker Corp., LegalZoom.com, Inc. and Carvana Co.
Exposure to non-benchmark stock Bruker Corp. (BRKR) was the largest detractor. The ML models have a favorable view of the stock, driven by its strong quality (R&D Intensity, buy back yield and capital efficiency) and valuation (operating cash flow to price, dividend yield and sales to price) features. BRKR, which operates in the medical supplies industry, struggled during the quarter after a weak earnings report capped off by a lack of confidence by the street in a recent M&A deal.
The overweight to LegalZoom.com, Inc. (LZ) detracted from relative returns. LegalZoom is a provider of online legal solutions and services and it falls into the high quality emerging leaders theme. The ML models have a favorable view of the stock, driven by its strong quality (R&D intensity and capital efficiency) features in combination with its size and industry relative characteristics. During the second quarter, the stock price declined in response to a weakening macro backdrop leading to a decrease in guidance for the year from management. The ML models, which focus on the long term, maintained a favorable view at the end of the quarter.
Not owning benchmark stock Carvana Co. (CVNA) was the third largest detractor. The stock performed well during the quarter after a solid 1Q24 earnings report driven by strong customer demand. Despite this, the ML models had a low rank on the stock at the start of the quarter driven by its quality (ROIC, capital acquisition ratio), technical factors (momentum, vol and realized medium term vol), and valuation features (operating cash flow to price, sales to price, performance of long-term value features). The models maintained their negative view throughout the quarter and remain on the sidelines.
Holdings detail
Companies mentioned in this report - percentage of Strategy investments, as of 06/30/24: Insmed Inc. 0.71%, Zeta Global Holdings Corp. 0.61%, Super Micro Computer, Inc. 0.00% ; Bruker Corp. 0.76%, LegalZoom.com, Inc. 0.42% and Carvana Co. 0.00%, 0.00% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to change on a daily basis.
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